R&D compliance activity and new compliance measures

HMRC have sent us an update about their compliance activities that they have confirmed we can share with our members. In addition, they have thanked us for sharing information about the Additional Information Form (HMRC are reminding companies that Additional Information Forms are required for all claims for R&D tax relief). HMRC say that they are now seeing a failure rate of around 15% (from the initial 45%), which HMRC say ‘is a great improvement, though suggests there’s still more for us to do’.

In September, we raised with HMRC the use of paragraph 16 of schedule 18 to FA 1998 to correct Corporation Tax returns in relation to R&D tax relief claims - R&D tax relief enquiries – use of power to correct Corporation Tax return. HMRC have provided the following update in relation to this and other compliance activity.

From HMRC:

Revenue Corrections

In ‘HMRC’s approach to Research and Development tax reliefs’, we set out the scale of non-compliance in the regime, and the related need to use the full range of investigative and compliance techniques to address this.

One element in this is the use of paragraph 16 of schedule 18 to Finance Act 1998 where it’s appropriate for us to do so.  

Paragraph 16 sets out: 

16(1) An officer of Revenue and Customs may amend a company tax return so as to correct– 

(a) obvious errors or omissions in the return (whether errors of principle, arithmetical mistakes or otherwise), and 

(b) anything else in the return that the officer has reason to believe is incorrect in the light of information available to the officer. 

We are correcting returns to remove Research and Development (R&D) tax relief claims where there is reason to believe they are incorrect, based on the information available to us. In these circumstances HMRC issues letters to help customers understand the reasons why we believe an R&D tax relief claim is not valid. This is aimed at claims where we’ve received information about the claim, but we believe it to clearly not be a valid claim (where there is any uncertainty an enquiry will remain the best option).

We wanted to highlight this approach to you in case you have had questions from your members.

New Letters

Additionally, we would also like to inform you of two letters the R&D Anti Abuse Unit (AAU) will be issuing imminently in response to claims being received that have a high risk of being invalid based on the information available to us:

• The first letter will be issued where we suspect no advance in science or technology has been sought by the business, but where they may be advancing their own state of knowledge only.
• The second letter will be issued in similar circumstances to the above but where the company is in a specific business sector where we wouldn’t normally expect R&D for tax purposes to have taken place, for example, hairdressers, beauticians, and personal trainers.  Whether a company is in a specific business or trade sector is not the only consideration.  This information is used in conjunction with other methods of identifying the correct customer base, so that we can reach as many companies as possible who may be approached by less than scrupulous R&D sales agents.   

Both letters will request that the claimant reviews HMRC’s R&D tax relief guidance to see whether the activities they have claimed does qualify for relief. After reviewing the guidance, if the claimant finds that their activities does not qualify, they will be asked to amend their return with the R&D claim removed.  If the claimant still believes they qualify, the letter will ask for them to provide further information to evidence the claim.

Why are we issuing these letters

Reinforcing HMRC’s commitment to tackle error and fraud in the R&D tax reliefs system, the Anti Abuse Unit was set up in July 2022. The team’s aims include increasing compliance activity to quickly and effectively identify deliberately incorrect claims. The AAU also aims to increase HMRC’s efforts to educate, encourage and facilitate genuine businesses to get it right first time, reducing error as well as tackling abuse.

These letters are intended to both educate and reduce error, by informing businesses of the correct meaning of R&D for tax purposes, and tackle abuse of the system by ensuring clearly unqualifying claims are scrutinised.

ENDS